Trade Agreements – Global Policy Watchhttps://www.globalpolicywatch.com
Key Public Policy Developments Around the WorldMon, 27 Apr 2020 18:35:52 +0000en-US
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1 https://wordpress.org/?v=5.3.3&lxb_maple_bar_source=lxb_maple_bar_sourceBelgium replaces COVID-19 medicines export ban to non-EEA countries with system of export controlhttps://www.globalpolicywatch.com/2020/04/belgium-replaces-covid-19-medicines-export-ban-to-non-eea-countries-with-system-of-export-control/
Fri, 10 Apr 2020 18:19:00 +0000https://www.globalpolicywatch.com/?p=9943Continue Reading]]>As previously reported on this blog, on 1 April 2020 Belgium adopted a complete ban on exports of certain medicines and raw materials to non-EEA countries to avoid shortages during the COVID-19 outbreak. On 8 April 2020, Belgium reversed this ban, and instead installed a system of export controls. Coincidentally or not, the same day the European Commission also issued guidelines to the member states on the rational supply of medicines.
Below I discuss the new approach to exports within and outside the EEA from Belgium.

1. Total export ban under the Decision of 1 April 2020

Article 3 of the Decision of the Federal Agency for Medicines and Health Products (“FAHMP”) of 1 April 2020 (“old Decision”) was drafted as a total export ban within and outside the EEA. By way of exception, EEA exports were lawful subject to prior notification to the authority. It did not provide for an exception for exports outside the EEA. It was the news article on the FAHMP website of 2 April 2020 that stated that exceptions could be requested for exports outside the EEA. This approach was highly questionable under EU law.

Article 3 of the FAHMP Decision of 8 April 2020 (“new Decision”) has essentially reversed the total export ban.

2. Non-EEA exports under the Decision of 8 April 2020

Pursuant to article 3(1), exports outside the EEA are now in principle permitted, subject to prior notification and insofar the Minister or the FAHMP have not opposed the export within three working days “after” the notification. The opposition will be communicated by email to the notifying wholesaler. The language of this provision suggests that if a company has not heard of the FAHMP within that period, the non-EEA export can go ahead.

The Decision states that the export outside the EEA can be refused if there is an “acute or imminent shortage of the relevant medicines or raw materials, insofar the available volumes are insufficient to fulfill the needs of patients in Belgium during the upcoming four weeks. The availability of an alternative, therapeutic equivalent alternative is taken into account, as well as the needs for the treatment of COVID-19 patients, on the basis of current epidemiological models and taking into account standard dosages.”

This new approach is likely compliant with EU law. Exports are in principle allowed, and the authority gives clear public health criteria that could be a ground for refusal. In general terms, three working days also appears a reasonable time-period, unless the planned export is itself particularly urgent given the global health emergency.

3. Exports within the EEA under the Decision of 8 April 2020

Article 3(2) has been redrafted to reflect that exports to the EEA are in principle permitted. Other than that, the requirements are identical as under the old Decision: prior notification is required, and the medicine or raw material must be destined for supply or administration in the EEA member state of destination.

]]>German Government decides on tightening the National FDI Screening Regimehttps://www.globalpolicywatch.com/2020/04/german-government-decides-on-tightening-the-national-fdi-screening-regime/
Thu, 09 Apr 2020 19:56:59 +0000https://www.globalpolicywatch.com/?p=9933Continue Reading]]>The German government has proposed a new draft bill reforming the current foreign direct investment (“FDI”) regime, which is likely to have a significant impact on all M&A transactions involving acquisitions of 10% or more of the voting rights in German companies active in “critical infrastructures” and “critical technologies” by any non-EU investors. Under the revised regime, such transactions will automatically be subject to a period of suspension until clearance is granted.

Background

Upon publishing a Ministerial draft on 30 January 2020, the German government started a legislative process to change the FDI regime embedded in the German Foreign Trade Act (“Außenwirtschaftsgesetz – “AWG”). Recently, the Federal Ministry of Economics and Technology (Bundesministerium für Wirtschaft und Energie – “BMWi”) presented the draft bill of 31 March 2020.

The main purpose of the legislation is to align the German FDI regime with EU Regulation 2019/452/EU (the “EU FDI Regulation”), adopted in March 2019 and based on a joint initiative of Germany, France and Italy. The EU FDI Regulation came into force on 11 April 2019 and will take full effect as of 11 October 2020. Further, the draft bill incorporates new rules to reflect certain practical enforcement experiences of the German authorities.

While the current FDI reform in Germany has been in the making for a while now, the events surrounding the present Covid-19 pandemic places the amendments into a wider perspective of tightening FDI developments at EU and Member State level in Europe.

We summarize the key amendments of the draft bill below:

Lowering of the review standard

Under the draft bill, in order to intervene in a transaction, the government must assess whether a proposed transaction is likely to affect public order or security. This amends and lowers the pre-existing review standard under which the government is required to make an assessment of whether a proposed transaction poses a threat to public order. According to the BMWi’s explanatory memorandum provided in the draft bill, this amendment aligns the AWG with the review standard of the EU FDI Regulation, and aims to better address the forward looking nature of FDI screenings.

Broadening of the scope of mandatory filing obligations to “critical technologies”

Under the current German FDI regime, mandatory filing obligations exist for the acquisition of 10% or more of the voting rights in companies active in:

the operation of “critical infrastructures” and similar activities (part of the cross-sector examination). Critical infrastructure includes facilities, equipment or parts thereof in the sectors of energy information technology and telecommunications, transportation and traffic, health water, nutrition, and the finance and insurance industries. Similar activities may relate to the development or modification of software for critical infrastructure, the monitoring of telecommunications, the provision of cloud computing services, telematics infrastructure or social services and to the media industry.

It is understood that the amendment of the AWG will be accompanied by amendments to the Foreign Trade Ordinance (Außenwirtschaftsverordnung – the “AWV”). The AWV cements the enforcement powers laid down in the AWG. The German government has already announced that the amendments of the AWV will include an extension of mandatory notification obligations regarding acquisitions of 10% or more of the voting rights in German companies active in the areas of “critical technologies” such as artificial intelligence, robotics, semiconductors, biotechnology and quantum technology.

Extension of the prohibition to implement transactions (“suspensory effect”)

The current German FDI regime prohibits the implementation of a transaction only for sector-specific examinations (i.e. in the defense space). The draft bill proposes to extend this prohibition to all transactions for which a mandatory filing obligation is established. Therefore, in the future the validity of all transactions falling within the scope of the sector-specific examination (i.e. mainly transactions concerning defense-related activities) and all transactions involving “critical infrastructures” and “critical technologies” will be suspended pending FDI control clearance.

In order to safeguard public order or security during the suspension period, the draft bill also implements a strict prohibition on providing the potential investor with “critical” information, i.e. information that is sensitive with respect to the FDI-purpose of protecting public order and security. We note that the explanatory memorandum states that the usual commercial due diligence should “typically” not be restricted by this provision. It will also be prohibited to grant the potential investor any voting rights (directly or indirectly) or rights to receive dividends (or other profit sharing rights) during the suspensory period.

Any breach of the prohibitions set out above may be punished with imprisonment for up to five years or a fine.

Conclusion

The draft bill will significantly enhance the enforcement powers of the BMWi. Among other things, the bill introduces a suspension period for all transactions that are subject to a mandatory filing obligation and lowers the review standard to allow the German authorities to intervene in a transaction based on a mere likelihood that it may affect public order and security.

In addition, the introduction of a suspensory effect will have a major impact on M&A transactions concerning “critical infrastructures” and “critical technologies” and involving all non-EU buyers, where automatic suspension will now apply for the first time. This may be particularly unexpected for transactions involving “critical technology”, which also become newly subject to FDI review generally.

* * *

]]>US-China Economic Relationshiphttps://www.globalpolicywatch.com/2020/02/us-china-economic-relationship/
Wed, 26 Feb 2020 18:26:51 +0000https://www.globalpolicywatch.com/?p=9772Continue Reading]]>Tim Stratford delivered this testimony before the the U.S. House Committee on Ways and Means February 26, 2020:

Chairman Neal, Ranking Member Brady, and distinguished members of this committee, thank you for the opportunity to share my assessment of the U.S.-China economic relationship following conclusion of the Phase One trade agreement between our two countries.

Over the past 38 years I have devoted my career to promoting fair and beneficial trade relations between the United States and China, because it’s seemed to me that getting this relationship right is one of the most consequential tasks and challenges of our time. I have done this as a lawyer, U.S. diplomat, general counsel of a major American company’s operations in China, and as three term chairman of the American Chamber of Commerce in China. As a former U.S. trade negotiator, I salute the extraordinary efforts of our negotiators today and understand the daunting challenges they face.

I would like first to discuss the trade policy issues that have negatively impacted this incredibly important relationship, and the extent to which they are addressed in the Phase One agreement. I would then like to discuss the agreement’s place within the context of the overall U.S.-China economic relationship, which is increasingly defined by competition and increasingly inseparable from national security considerations. Finally, I would like to offer some thoughts on lessons learned, as well as on U.S. objectives over the coming months and years and possible approaches for achieving them.

Issues in the U.S.-China Trade Relationship

As I see it, U.S. trade negotiators have confronted three types of issues with China, with the three types listed below in ascending order of difficulty and criticality:

First, there are issues on which China has previously made commitments, either multilaterally or bilaterally, but has not fully delivered on its promises. These can be very specific pledges to open a particular sector or change a regulation, or they can be broad statements of principle, such as a commitment to strengthen intellectual property protection or refrain from state interference in commercial transactions. In some cases, the commitment has been implemented only partially; in others, not at all; or in many cases, it has been nominally implemented, but then Chinese officials have taken other actions that have had the effect of denying the intended benefit to China’s trading partners.

Second, there are issues on which no commitments have been made but where existing measures and practices stand in the way of fair and reciprocal trade. For example, Chinese companies are able to do business in certain sectors and sell certain products and services in the U.S. market, while American companies are not permitted to do the same for these sectors, products, and services in China. Chinese cloud service providers, for example, can freely operate in the U.S., but U.S. providers of cloud services cannot have a meaningful commercial presence in China.

Third, there are issues that are systemic and rooted in China’s economic model — that create uneven competitive conditions for producers and service providers from other countries. When China joined the World Trade Organization, the hope and expectation of China’s trading partners was that China would gradually converge with international norms and evolve into a more market-oriented and transparent economy. Although China has opened markets and welcomed foreign investment in a number of sectors, the state’s decisive role in certain key sectors such as financial services, telecommunications, energy, and transportation, and its ambitious goals in important high tech sectors as exemplified in the Made in China 2025 program, work to advantage Chinese national champions domestically and globally — through subsidization, protectionist industrial policies, and opaque informal measures that defeat the assumption that trade is conducted on the basis of comparative advantage. These issues have intensified in recent years as China has in various ways doubled down on this state-led model and strengthened the Communist Party’s control over the economy and business.

The limitations of the approaches and tools that the United States has relied on over the past two decades to address these issues have become increasingly apparent. For an international agreement to be effective and durable, each side must believe that implementation of the agreement is in its own interest, and the agreement must usually establish an effective enforcement mechanism. However, multilateral and bilateral trade agreements and dialogues with China have often produced incremental commitments that China — over time — has not regarded as fully in its interest, and that have not been supported by processes to effectively enforce their implementation. The WTO’s disciplines, for example, simply do not speak to many of the most serious problems, and the WTO dispute settlement mechanism, while successful in many cases, has often required so much time to complete that the damage was done by the time a final ruling was issued and implemented.

As we know, the Trump Administration has taken a radically different approach, returning to Section 301 of U.S. trade law — a unilateral tool that had been used to address unfair trade practices before the WTO was established. This led to the imposition by the U.S. of additional tariffs on approximately $370 billion in Chinese goods and retaliatory tariffs by China on nearly $100 billion in U.S. goods. Eventually, both sides found their way back to the negotiating table, with a sweeping negotiation agenda far broader than the issues covered in the Section 301 report — which had focused on technology transfer and cyber-theft of intellectual property. As Ambassador Robert Lighthizer testified before this committee, the Administration was “pressing for significant structural changes that would allow for a more level playing field.”

Assessing the Phase One Trade Agreement

The resulting Phase One agreement secured commitments from China in five areas that were often the subject of past negotiations: intellectual property, technology transfer, agriculture, financial services, and currency. In some cases, these commitments broke new ground and significantly exceeded the results of past negotiations. In other cases, they affirmed, clarified, or expanded somewhat upon existing commitments.

On intellectual property, the agreement includes specific provisions related to trade secrets, patents, online piracy, geographical indicators, bad-faith registration of trademarks, and enforcement. With respect to trade secrets, many of the promised reforms — which could significantly strengthen protection of this form of IP — had already been codified in recent Chinese legislation. But it is no doubt the case that this legislation was catalyzed in part by the negotiations, as well as by China’s own desire to foster innovation and improve its image on IP protection. The agreement breaks the most new ground on patent protection for pharmaceuticals, in some cases reflecting reforms that China had contemplated but until now had not actually adopted. These commitments include provisions for patent term extensions and a mechanism for early resolution of patent disputes. However, the agreement does not address other areas where U.S. stakeholders in other industries — especially in the Information and Communications Technology (ICT) sector — have had serious concerns, such as China’s approach to standards essential patents, and the impact of Chinese competition law enforcement on licensing agreements and global patent disputes. The agreement builds modestly on existing bilateral commitments in the areas of online piracy and geographical indicators. It also addresses bad-faith registration of trademarks, though it does not commit China to take any specific action in this regard. It commits China to strengthen criminal deterrents to IP theft, reflecting in part new measures that China rolled out last year; but it stops short of requiring more fundamental reforms to China’s judicial system. With respect to enforcement, the agreement emphasizes one-time “campaign-style” enforcement initiatives against specific types of infringement, though this is a model that has failed in the past to produce lasting change. The agreement also helpfully commits China to publish an IP action plan within 30 working days after the agreement takes effect (which was on February 14). Overall, as observed by noted Chinese IP law expert Mark Cohen of the Berkeley Center for Law and Technology: “The reforms in the Agreement…in many cases appear more focused on yesterday’s problems. While the continued emphasis on administrative agencies and limited focus on civil remedies is disappointing, there are nonetheless many notable IP reforms in the Agreement in addition to legislative reforms already delivered.”

On technology transfer, which occupies a mere two pages of the text, the commitments are on the level of general obligations not to compel the transfer of technology or direct outbound investments to acquire technology. China’s government has consistently denied engaging in forced technology transfer, and the agreement does not address the incentives in China’s system that create informal pressures on foreign companies to transfer technology. But the general principles, which were also codified last year in China’s new foreign investment law, may provide an enforcement hook or a foundation for future negotiations.

On agriculture, the agreement represents significant progress in the form of detailed commitments to remove a long list of specific non-tariff barriers that impede U.S. agriculture, seafood, and biotech exports, while also calling for improved transparency in Chinese regulatory processes. The value of these commitments will depend on whether China introduces new barriers to keep out the same products, and if it does, on whether the enforcement mechanism can effectively address this issue as it arises.

On financial services, the agreement memorializes and modestly expands upon China’s recent actions to open its financial sector to greater foreign participation. The main value- adds contributed by the agreement are to commit China to timelines for the approval of licenses and to clarify the permitted scope of business in individual sectors of financial services.

On currency, the agreement breaks almost no new ground, largely reiterating commitments that China has already made in the G-20, the IMF, and bilaterally, such as to refrain from competitive devaluation — which has not been an issue for several years, and to enhance transparency around intervention in foreign exchange markets.

In addition to addressing issues in each of these five areas, the Phase One agreement also includes two novel features that distinguish it from past agreements and are potentially quite impactful — at least in the short run, namely, specific commitments to increase imports from the United States, and agreement to implement a new type of enforcement/dispute resolution mechanism.

On expanding trade, China has committed to import an additional $200 billion of U.S. goods and services during the 2020-21 time period — beyond what it would have imported if it simply maintained the annual level of imports it achieved in 2017. This commitment may present real sales opportunities for U.S. firms, especially given the specific annual purchase amounts agreed upon for 20 subcategories of manufactured goods, agricultural products, energy, and services. But how China will implement this commitment is uncertain, especially with the impact of the Coronavirus outbreak — which will adversely affect the Chinese economy at least in the short term and reduce the purchasing power of Chinese companies and citizens. Moreover, there is an inherent tension in this chapter of the agreement between specific purchase commitments and language stating that purchases will be made based on commercial considerations and market conditions. There is also a disconnect between what amounts to managed trade and the emphasis on market-based reform included elsewhere in the agreement. Some commentators have flagged a potential conflict with China’s WTO obligations — to the extent that these commitments are deemed as binding restrictions on trade flows. The agreement attempts to address these concerns about possible trade diversion by stressing that reforms undertaken according to the agreement — and the resulting increased trade flows — will expand exports to China from other countries as well as from the United States.

The dispute resolution mechanism is unlike that of the WTO and most free trade agreements in that it relies not on an independent arbitral body but instead on the right of the complaining party to impose “a remedial measure in a proportionate way” to address an alleged violation of the agreement — following a process of escalating bilateral consultations. If the responding party believes that the complaining party is acting in bad faith in taking such an enforcement action, its only recourse is to withdraw from the agreement. This right to be “judge, jury, and executioner” could provide swifter and more certain enforcement. But it may also increase the fragility of the agreement. For example, if China feels the U.S. is acting unfairly in unilaterally enforcing the agreement, it could claim U.S. infractions and impose its own remedial measures as retaliation. The result could be an unraveling of the Phase One agreement and a return to the retaliatory tariffs and downward spiral in the relationship that the agreement was intended to address. Moreover, it is unclear whether a proportionate remedy would apply sufficient pressure to compel China to make changes it does not want to make. USTR has not yet created any formalized, confidential process for industry or other stakeholders to provide input on compliance issues, and American companies have traditionally been reluctant to complain for fear of retribution in China. Similarly, there is no formal process yet for stakeholders to feed into the new bilateral trade dialogue also set up by the agreement, which is intended to fill a gap created by the Administration’s dismantling of previous dialogues and their various industry working groups. Nevertheless, speaking as a former U.S. trade negotiator, I would have been delighted to have had access to this new dispute resolution process as I worked to remove barriers American companies experienced in China, because in the past we essentially had no enforcement option other than to launch a WTO case — and in most cases that was not a viable option for reasons referred to above. Working to ensure the effectiveness of this new process — despite its inherent limitations — is likely to be a major focus of USTR’s efforts over the coming months, and its ongoing successes and/or failures will no doubt help shape prospects for progress during the Phase Two negotiations.

In summary, on the substantive commitments, the agreement represents new progress primarily in protecting intellectual property — especially for pharmaceuticals, and in addressing long-standing trade barriers to American farm exports. Most of the issues affecting U.S. technology companies — such as digital trade, technology licensing, and cybersecurity regulation — were not addressed, nor were those affecting services other than financial services.

Many of the commitments included in the agreement fall into the first category of issues that I described at the outset and are aimed at reiteration, amplification, and clarification of previous commitments. In addition, a fair number fall into the second category and represent new commitments addressing various discrete trade barriers and specific examples of non-reciprocal treatment. But virtually nothing in the agreement substantially addresses any of the category three “systemic issues,” which arise because of differences in the economic models of our two countries. Unfortunately, as noted above, it is the systemic issues that are most critical, as they are the ultimate source of the imbalances in our economic relationship and basis for the perpetuation of an uneven playing field.

Impact of National Security Concerns on the Bilateral Economic Relationship

One of the reasons these negotiations have failed thus far to address the systemic issues is that national security concerns on both sides have greatly complicated the trade relationship. For the U.S., national security policies have traditionally had a relatively limited impact on trade policy. But now, both the U.S. and China are justifying a wide range of measures that have enormous impact on trade and investment in the name of national security. This is in large measure due to technological change, where ubiquitous and rapidly evolving consumer technologies such as those found on our mobile devices — and the use of big data associated with them — may also have advanced military applications or create sobering national security vulnerabilities.

Moreover, China’s aggressive pursuit of its Made in China 2025 strategy and other similar industrial policy goals has heightened concerns in the U.S., Europe, and elsewhere that China is exploiting differences in our economic systems to advance its own system and strategic interests at others’ expense. These concerns are amplified by the growing strategic competition between the U.S. and China. As the race for technological superiority between our two countries intensifies, and each country takes steps to protect its national security that grant advantages to its own companies, each side is growing increasingly wary of the intentions of the other regarding the future of bilateral economic relations. Concern is growing in this country that China’s ambitious industrial and technology acquisition policies are aimed at achieving military and geostrategic dominance. And China seems increasingly convinced that the intention of the United States — including through the instrumentality of the trade negotiations — is to impede China’s technological development and ultimately to undermine the rule of the Communist Party.

Under these circumstances, we should expect that China will resist more strongly than ever U.S. pressure to reduce industrial policy support for domestic high-tech industries or to open its markets further to the U.S. — especially when it believes that it could be hit at any time by new tariffs or sanctions that make reliance on U.S. goods, services, and technologies a vulnerability. It is therefore hard to see how our two countries will be able to address the systemic trade issues unless a broad and shared understanding is reached regarding which technologies each country must control, which data flows they should restrict, and which supply chains and infrastructure they must protect on national security grounds. And yet, national security-related issues are outside the mandate of the trade negotiators, and there is currently no parallel, coordinated channel for the two countries to discuss how to manage the intersection of trade policy and national security concerns.

Lessons Learned from the Phase One Trade Negotiations

Looking ahead, we can be sure that future developments in U.S.-China economic relations, in the economic development policies of each of our two countries, in the business plans and activities of individual American and Chinese businesses, and in the economic policies and strategies of governments and companies in other countries — will all be profoundly impacted by what we each have learned in the course of the Phase One trade negotiations and the trade war that accompanied them. And what exactly have we learned?

Perhaps most significantly, the Chinese government has almost certainly concluded that — from its perspective — the U.S. is not as “reliable” a trading partner as previously assumed. The importance of this new assessment cannot be overstated. For the first time since China joined the WTO almost two decades ago, the U.S. has demonstrated a willingness to impose substantial tariffs on a vast array of Chinese goods and to significantly tighten restrictions on Chinese businesses’ access to various U.S. technologies and high tech components — either to increase U.S. leverage in the trade negotiations or to address national security concerns.

As a result, the government of China — as expected — is rapidly accelerating its efforts to become self-sufficient in key technologies, components, and commodities, in order to reduce future vulnerability to U.S. pressure. This is particularly evident with respect to elements of its economy that it regards as “critical infrastructure.” This means that in these particular sectors, opportunities for U.S. companies to participate in the hugely important China market are diminishing in significant ways, and the Chinese government is strongly incentivized to increase its industrial policy support for Chinese companies rather than engage in the types of systemic reforms sought by the U.S. It also means that addressing these systemic issues in “Phase Two” negotiations will be extremely difficult, and that the Chinese government will likely want to maintain the current fragile truce and draw out the negotiation process as long as possible in order to extend the time period it has to prepare for the next time the U.S. decides to impose tariffs or other sanctions. During this negotiation process, the Chinese government will likely offer “concessions” — intended to forestall re-escalation — that do not undermine key industrial policy objectives and that play to politically important domestic U.S. constituencies. They will also likely believe, based on the U.S. willingness to conclude the interim “Phase One” agreement, that in the immediate future the U.S. appetite for further tariff escalation is limited, and that it will be better for China to respond to the U.S. tit-for-tat in any future tariff battles that may arise than to abandon elements of their economic development model that they believe have worked well for them.

The U.S. government has learned that the imposition of tariffs can certainly help bring Chinese officials to the negotiating table, but that tariffs alone are not enough — at least at present — to persuade the Chinese government to make commitments it believes are not in its own interest, especially when such commitments would require significant changes to its existing economic model. The U.S. government has also come to better understand the near-term cost and disruptive impact on American businesses, on American competitiveness and innovation, and on the U.S. and global economies that can result from escalating tariffs and other restrictions on bilateral economic cooperation. However, as discussed below, the full cost and disruptive impact of engaging in this tariff war have only just begun to be felt; the full extent of the longer-term impact will depend on how wisely China and the United States manage the next stage of this relationship.

American companies have learned that their businesses cannot rely as fully as in the past on suppliers or customers in China — and the same is true for Chinese companies relying on Americans — because of the risk that new tariffs or trade and investment restrictions may be applied by one or both of the two governments. Again, the importance of this development cannot be overstated, though it is taking time for the full implications to become evident, and the impact is being felt in some sectors much more heavily than in others. Depending on the sectors in which they operate and the primary markets in which they wish to sell, American companies must often now adopt either an “in China for China” strategy, or a “China plus one” strategy.

Under the first, American and other foreign companies seek to meet Chinese industrial policy and national security requirements by working with local partners to design and manufacture products (or provide services) in China for the China market. This strategy is most likely to be attractive to companies that prioritize the China market. It is most likely to be accepted by Chinese regulators (a) so long as pure domestic companies are unable to provide equivalent products and services of adequate quality, or (b) after domestic Chinese companies have already established market dominance in the particular sector. Under the “China plus one” approach, American companies that look to China for inputs seek to supplement their existing Chinese suppliers with suppliers outside of China, and American companies that have relied critically on China as a market seek to develop other markets — in both cases to help mitigate the risk that trade flows between the U.S. and China may experience further disruption. Indeed, no matter what country you hail from, if a new factory needs to be constructed or a new supplier brought on line, and if you hope to sell into the two largest markets in the world — namely, the U.S. and China, then the safest bet is to invest in a location other than one of these two countries, to avoid the risk that one of them may restrict trade flows from the other.

Achieving a New Equilibrium in U.S.-China Economic Relations

Most Americans doing business with China understand the imperative each country feels to safeguard its national security and foster its own economic and technological development, and most acknowledge that circumstances have changed over the past twenty years, requiring a major recalibration of the U.S.-China economic relationship. As this recalibration unfolds, many are making adjustments to their business strategies and plans. However, we should not accept the simplistic and largely unexamined view, embraced by some, that the United States will ultimately be better off — both economically and from a national security perspective — if the two economies are “decoupled.” Indeed, we should be especially concerned if such decoupling proceeds largely unguided and unbounded as a result of conflicting policy signals emanating from Washington and Beijing. We should remember that despite the challenges we face, the United States has benefited enormously from China’s development over the past two decades, and from the relatively positive relations between our two countries that have accompanied it. Given the complexity of existing supply chains, the revenues our high tech companies have received from China that have largely funded their ongoing R&D efforts, and our own vulnerabilities if these supply chains are disrupted, we should only contemplate decoupling if it would involve critically sensitive technologies that are narrowly defined — and if the feasibility of a specific decoupling measure has been confirmed on the basis of a careful cost/benefit analysis. The American and Chinese people will both benefit greatly if we limit the negative impact of national security measures on our economies by erecting “high walls around small spaces,” and by providing more predictability for businesses.

With respect to the systemic trade policy issues, it appears that a new approach is required. In the past, US-China relations were guided largely by a shared interest in helping China “align with the world” (与世界接轨), i.e., to participate in and conform to the world order established and led by the United States. China’s accession to the WTO after a very lengthy negotiation period was a major milestone in this process, and since that time, U.S. trade negotiations with China have generally focused on China’s often imperfect compliance with the U.S. view of how WTO members should regulate their economies.

However, in the course of the current negotiations and in the face of substantial pressure from the United States, the Chinese government evidently decided to reject more explicitly and forcefully than before the U.S. view of how economies and economic relations with other countries should be regulated. They want to be seen as champions of “globalization,” but their interpretation of “globalization” is a kind of “globalization with Chinese characteristics” that accommodates China’s economic model and political system.

For this reason, since China is not likely within the short-to-mid-term to make further meaningful changes to its system, it makes sense, in future US-China negotiations, to adopt a new paradigm. Rather than focusing on (and arguing about) China’s conformity with the existing world order, this new paradigm would explicitly acknowledge China’s different approaches and — to use a Chinese phrase — seek “harmony despite differences” （和而不同). Such an approach could be implemented in a way that respects China’s sovereignty, and at the same time it could result in a more proactive and clear-eyed response to the challenges presented by China’s economic development model. This approach could include (1) explicitly delineating ways that the Chinese economic model and version of globalization differs from the U.S. model and version — in terms of policies, practices, and impact on others, and (2) identifying ways to mitigate specific harms that the other party may suffer as a result of those differences.

Such an approach would require high level negotiations between the U.S. and China where the negotiators on each side would be empowered to address a broad array of bilateral issues. It would also require a level of candor, confidence, and commitment that neither country has fully demonstrated in its dealings with the other. During the height of the Cold War, American and Soviet negotiators were able to develop shared language and analyses that allowed them to manage the risks inherent in their large nuclear arsenals. Today we face challenges with China on economic issues, national security issues, and issues that lie between. Without greater candor, confidence, and commitment, each side may well assume the worst of the other and adopt policy stances harmful to both sides.

In the meantime, when candor is not forthcoming by one side regarding its policies or practices that may be harmful to the economic interests of the other side (e.g., with respect to subsidies provided to its industries), the complaining side could transparently announce, justify, and apply adverse inferences and reasonable mitigation measures. Hopefully through this process, the level of trust and predictability in the bilateral economic relationship would rise as each side sees the value of transparency in its economic policies and practices and the importance of reasonable proportionality in its responses to the harmful conduct of the other side.

On the U.S. side, working through all of these issues will require close coordination and communication — between the legislative and executive branches of our government, within the interagency process in the executive branch, and also between government and the private sector. We are entering uncharted waters, as there is no modern precedent for two countries to be at the same time each other’s main economic partner and major military and geopolitical rival.

At the same time that we work through these issues domestically in the U.S. and bilaterally with China, we should also work much more closely and actively with Europe, the UK, Japan, South Korea, and other nations and international bodies to develop constructive multilateral and plurilateral responses to the challenges presented by China’s policies and practices. And most importantly, the U.S. government and private sector will need to focus more on our own path for future economic and technological development — to ensure our long-term success in competing with China and other powers. Congress, and your Committee in particular, will need to play a critical role in guiding and propelling these endeavors.

Addressing each of these challenges will require exceptional wisdom, creativity, and persistence. But few undertakings will affect so profoundly our own national interests and the well-being of so many people as this one. The bilateral economic relationship has served as the ballast for the overall relationship between the U.S. and China since the normalization of diplomatic relations in 1979. We cannot afford to ignore or mismanage this important stabilizing influence and driver of economic benefits and goodwill.

]]>Companies Should Understand USMCA’s Labor Obligations as They Are Significant and Likely to Be Enforcedhttps://www.globalpolicywatch.com/2020/01/companies-should-understand-usmcas-labor-obligations-as-they-are-significant-and-likely-to-be-enforced/
Tue, 28 Jan 2020 18:46:08 +0000https://www.globalpolicywatch.com/?p=9750Continue Reading]]>Because labor-related obligations in existing U.S. trade agreements are general and largely hortatory, few enforcement actions have been taken with regard to these obligations. The labor obligations in the Agreement between the United States of America, the United Mexican States and Canada (“USMCA” or “Agreement”), however, are specific and likely to be enforced. In fact, unprecedented support of the USMCA by U.S. labor unions suggests that they are likely to press this and future administrations to vigorously enforce USMCA labor obligations, especially with regard to Mexico. Companies doing business in Mexico or sourcing goods from Mexico should understand USMCA’s labor obligations and develop compliance plans in preparation for entry into force of the Agreement.

Background

President Trump is set to sign the implementing legislation this week, which finalizes the United States’ ratification of the Agreement. Based on the terms of the Agreement, the USMCA will enter into force three months after the last notification is received by the Parties indicating that each Party has “completed the internal procedures required for entry into force.” Although it is unclear precisely when the USMCA will enter into force because many of the implementation requirements are still being worked out by the Parties, we think that companies should be prepared for the Administration’s enforcement of the new labor provisions.

The USMCA contains significant new labor-related provisions, including the:

Requirement for Mexico to pass legislation recognizing the right of workers to engage in collective bargaining.

First of its kind “Facility-specific Enforcement Mechanism” that is a rapid response mechanism to allow complaints to be brought against facilities for violating the rights of freedom of association and collective bargaining.

New enforcement and monitoring mechanisms that allow for the inspections of factories and facilities that are not living up to their labor obligations.

New “labor value content” rules for the automotive sector.

Below is an overview of each of these new provisions.

Worker Representation and Collective Bargaining

The USMCA Labor Chapter contains obligations requiring all Parties to adopt and maintain in law the labor rights as recognized by the International Labor Organization (“ILO”) Declaration on Rights at Work, including core worker representation and collective bargaining rights. The Annex to the Labor Chapter also includes obligations that are specific to Mexico, such as requirements that Mexico pass legislation recognizing the right for workers to engage in collective bargaining.

Facility-specific Enforcement Mechanism, Verifications and Penalties

The USMCA includes the strongest labor rights monitoring and enforcement mechanisms in any U.S. free trade agreement concluded to date. These include the creation of a “Facility-specific, Rapid Response Labor Mechanism” established through the addition of a special Annex to the Dispute Settlement Chapter of the Agreement. Under this mechanism, a Party believing that labor rights are being denied at a particular facility in the territory of another Party may request the establishment of a panel to investigate the matter. The powers of the panel include conducting on-site verifications at the facility in question, subject to the responding Party’s consent.

Where the verification (or a lack of cooperation by the responding Party) leads to a determination that the facility in question is, in fact, failing to accord labor rights to workers, that facility may be subject to punitive measures by the foreign Party that initiated the complaint. Such measures include a suspension of preferential tariff treatment for goods manufactured at the facility, or the imposition of penalties on goods or services provided by the facility. Furthermore, where a facility found to have failed to accord labor rights is owned or controlled by the same person as other facilities producing similar goods or services with prior violations, penalties may be extended to the goods or services of all such facilities.

Labor Value Content Rule for Automobiles and Trucks

Under the Rules of Origin Chapter, in order to make preferential duty claims for imports of passenger vehicles and light and heavy trucks, the Agreement sets forth specific percentages of vehicle content that must be manufactured with a minimum hourly wage of US $16 per hour. The specific percentage required begins at 30 percent labor value content (“LVC”) and increases annually before reaching its final (fully phased-in) value of 40 percent three years after entry into force. The intent of this provision is to protect U.S. automobile manufacturing jobs and prevent the shift of manufacturing jobs to lower wage jurisdictions. The Parties are currently working on uniform regulations for the rules of origin impacting the LVC and also other origin requirements for aluminum and steel and regional value content requirements for the automotive industry.

Steps Companies Should Consider

In light of the increased scrutiny and focus on labor rights in Mexico, we recommend that companies consider taking the following actions:

Develop a comprehensive understanding of their supply chain in Mexico and the labor policies and standards of their Mexican suppliers, manufacturers, and service providers.

Develop a written code of conduct for suppliers and service providers in Mexico.

Institute a robust internal control process to monitor compliance with the code of conduct in order to avoid loss of duty preference claims, imposition of penalties, and potential delayed or rejected shipments.

The automotive sector should continue to review LVC as the Parties to the Agreement further define critical details for implementation of the LVC and create new uniform regulations.

]]>U.S.-China “Phase One” Trade Dealhttps://www.globalpolicywatch.com/2020/01/u-s-china-phase-one-trade-deal/
Fri, 17 Jan 2020 19:26:12 +0000https://www.globalpolicywatch.com/?p=9709Continue Reading]]>On January 15, 2020, President Trump and Chinese Vice Premier Liu He signed the much-anticipated “Phase One” trade agreement between the U.S. and China. Set to take effect no later than February 14, 2020, the “Economic and Trade Agreement Between the United States of America and the People’s Republic of China” (the “Agreement”) is the first formal accord concluded between the U.S. and China since the U.S. began imposing tariffs on Chinese imports in July 2018 and China responded in kind, triggering protracted negotiations buffeted by additional rounds of tariffs. In this respect, the Agreement signals a potential easing of trade tensions and renewed confidence in the bilateral economic relationship. The tariff landscape, however, will likely stay intact in the near-term future, and the Agreement may not ameliorate core U.S. concerns about China’s problematic intellectual property practices and China’s state-led economic development model. It remains to be seen how new obligations will be interpreted and enforced, and how the parties’ subsequent negotiations will evolve.

]]>What To Know Before Moving Your Supply Chain Out Of Chinahttps://www.globalpolicywatch.com/2019/12/what-to-know-before-moving-your-supply-chain-out-of-china/
Thu, 05 Dec 2019 22:27:36 +0000https://www.globalpolicywatch.com/?p=9632Continue Reading]]>A main weapon that the United States has used in the ongoing trade war with China has been import tariffs that target Chinese goods. Many U.S. companies are considering moving their supply chains out of China in the hopes that, if they are not importing goods from China, they can avoid these tariffs. In a recent article, we considered how companies can successfully move their supply chains from China with a particular focus on country-of-origin determinations made by Customs and Border Protection and antidumping and countervailing duty circumvention determinations made by the Department of Commerce. We also identified practical considerations for companies considering moving their supply chains.
]]>ITC Issues Notice for Petitions for the 2019 Miscellaneous Tariff Bill Cycle”https://www.globalpolicywatch.com/2019/10/itc-issues-notice-for-petitions-for-the-2019-miscellaneous-tariff-bill-cycle/
Tue, 22 Oct 2019 20:44:08 +0000https://www.globalpolicywatch.com/?p=9561Continue Reading]]>With the recent plethora of new tariff measures aimed at imports of steel, aluminum, solar panels, aircraft, and a wide array of products from China, tariffs are affecting the bottom lines of American companies in a way not seen in decades. For importers seeking tariff mitigation options, a window of opportunity has just opened. In a notice published in October 11’s Federal Register, the U.S. International Trade Commission (“ITC” or “Commission”) has issued its triennial notice soliciting petitions for duty suspensions and reductions for consideration during its Miscellaneous Tariff Bill (“MTB”) 2019 petition cycle. Through this process, mandated by the American Manufacturing Competitiveness Act of 2016 (the “Act”), an individual product may receive a reduced or suspended duty if that product does not directly compete with a product made in the United States and the lost tariff revenue is less than $500,000 per year.

The MTB addresses normal most-favored-nation (“MFN”) tariffs, not antidumping, countervailing duty, Section 301, or other trade remedy tariffs. Although the average U.S. MFN import tariff rate is quite low (under 2%), the United States maintains MFN duty rates on a number of products that either are not made in the U.S. or are made in only small quantities insufficient to meet demand. From a policy standpoint, the United States can use these tariffs as bargaining chips in multilateral and bilateral trade negotiations, where they can be offered in exchange for tariff reductions that benefit U.S. exporters. As long as the tariffs remain in effect, however, they impose a cost on U.S. manufacturers and consumers with little or no benefit to U.S. economic interests. Suspending them can provide importers with some modest relief in the current trade environment.

For many years, Congress offered temporary relief to U.S. importers from such tariffs through the MTB. After 2010, the MTB process ground to a halt—a victim of the House of Representatives’ move to ban earmarks. Because individual MTBs tend to benefit only one or a handful of U.S. producers, they were swept up in the general definition of earmarks, making it impossible for Congress to take up new MTBs. In passing the Act, Congress solved the earmark problem by delegating responsibility for assembling MTBs to the ITC.

Under the new procedures, interested parties have an opportunity every 3 years to submit to the ITC petitions for duty suspensions or reductions. The ITC undertook its new MTB process in October 2016, and as a result Congress enacted the Miscellaneous Tariff Bill Act of 2018. Congress authorized duty suspensions and reductions on 1,655 products. All duty suspensions and reductions under the Miscellaneous Tariff Bill Act of 2018 will expire on December 31, 2021.

Parties seeking a duty suspension or reduction in the 2019 MTB cycle—including a renewal of a suspension or reduction from the 2016 MTB cycle—must file a petition through the Miscellaneous Tariff Bill Petition System available on the ITC’s MTB website. All duty suspensions and reductions from the 2016 MTB cycle must be renewed or otherwise will expire. Parties may request renewal of a provision even if they were not the original petitioner in 2016. Petitions in this cycle must be filed by December 10, 2019.

Petitions must include detailed descriptions of the product, its tariff classification, its uses in the United States, the identity of any U.S. producers and all known importers, and an estimate of the likely total value of imports of the product by the petitioning party for the next 5 calendar years. The ITC will publish all petitions on its website and provide for public comments. The ITC will then submit a preliminary report to the Ways & Means and Finance Committees, indicating for each proposed duty suspension or reduction whether there is domestic production of the article (and, if so, whether any domestic producer objects to the duty suspension) and providing an estimate of the loss of revenue.

The ITC will advise the Committees which petitions meet the requirements of the Act, which may be modified to comply with the Act or to overcome domestic objections, and which it does not recommend for inclusion in the MTB. A final report will follow, including revenue loss projections. The Congressional Committees retain the right to exclude from an MTB any duty suspension request that is the subject of an objection from a Member of Congress, that is for an article where there is domestic production, or that the Committees oppose for other reasons. All suspensions recommended for inclusion by the ITC and not excluded by the Committees will be included in MTB legislation, which will then be submitted for approval by Congress at the end of 2020 or early 2021.

]]>How Much Is Enough? Federal Circuit Appeal May Decide Level of U.S. Manufacturing Required Under the TAAhttps://www.globalpolicywatch.com/2019/10/how-much-is-enough-federal-circuit-appeal-may-decide-level-of-u-s-manufacturing-required-under-the-taa/
Tue, 22 Oct 2019 17:43:56 +0000https://www.globalpolicywatch.com/?p=9558Continue Reading]]>A long-standing dispute over the approach to country of origin determinations under the Trade Agreements Act (“TAA”) may soon be resolved, as the Federal Circuit recently heard oral argument in one of two cases presently examining key aspects of this statute. Among other questions presented, the court may decide the standard for determining whether a product may be considered a U.S.-made end product — a question that could have far reaching implications for product manufacturers across all industries.

Statutory Background – The BAA and TAA

Acetris Health, LLC, v. United States, 2018-2399 (Fed. Cir. 2019) centers around two key supply-chain statutes: the Buy-American Act (“BAA”) and the TAA. The BAA implements a preference for the procurement of American-made goods by effectively imposing a penalty in the form of a price increase on offerors who propose goods that are not “domestic end products.” FAR 25.101(a). A domestic end product “(1) must be manufactured in the U.S.; and (2) the cost of its domestic components must exceed 50% of the cost of all components.” Id. The BAA generally applies to federal procurements in excess of $2,500, but there are a number of exceptions. Important here, the TAA has traditionally been treated as a waiver of all BAA requirements for procurements valued above a certain threshold, currently set at $180,000 for most non-construction procurements. FAR 25.402(b).

The TAA seeks to support free-trade agreements and initiatives by placing U.S. and designated countries’ products on equal procurement footing. If the TAA applies, it generally prohibits procurement from non-designated countries — such as China, India, and Indonesia — and opens procurement to end products that are “wholly the growth, product, or manufacture of” or substantially transformed in the U.S. or designated countries. 19 U.S.C. § 2518(4)(B). Because the TAA waives the BAA’s requirements in certain procurements, many have contended that when the TAA applies, its country of origin test allows for procurement of only those products that are either (1) wholly manufactured or (2) substantially transformed in the U.S. or a designated country. Id.

Litigation Background

Acetris, a manufacturer of generic pharmaceutical products, challenges the position that the TAA fully supplants the BAA and argues that the BAA’s definition of manufacturing still applies to products manufactured in the U.S. Accordingly, for products manufactured in the U.S. there is no need to demonstrate under the TAA that the product is “wholly” manufactured in the U.S. Acetris first presented this argument in a country of origin determination request before U.S. Customs and Border Protection (“CBP”). However, CBP concluded that under the TAA, “manufactured in the United States” means that the product must be “wholly the growth, product, or manufacture of that country.” 19 C.F.R. § 177.22(a). Thus, because Acetris’ drug products were not “wholly” manufactured in the U.S., the drug products could not be considered U.S.-made end products.

Acetris also argued before CBP that its drug products had a U.S. country of origin because the drug product components were substantially transformed there. A product has been substantially transformed when it is “a new and different article of commerce with a name, character, or use distinct from that of the article[s] from which it was so transformed.” 19 U.S.C. § 2518(4)(B). Relying on its prior decisions that focus on a product’s active pharmaceutical ingredient (“API”), CBP rejected Acetris’ position that “extensive additional processing” in the U.S. substantially transformed the India-sourced API into a stable drug product safe for public consumption, because the API retained its chemical and physical properties during U.S. processing, and the API’s medicinal use was unaffected. See 83 Fed. Reg. 5133 (Feb. 5, 2018). As a result, CBP ruled that India was the country of origin for those drug products because the API was manufactured there.

Acetris challenged CBP’s determinations in two lines of litigation. Most relevant here, Acetris filed a bid protest in the Court of Federal Claims (“CFC”) challenging the terms of a Department of Veterans Affairs (“VA”) solicitation that required prospective bidders to certify its products were TAA compliant using only the country of origin test. See Acetris Health, LLC v. United States, 138 Fed. Cl. 579 (2018). The VA determined that Acetris’ drug product was non-TAA compliant based on the prior CBP ruling that the drug product’s country of origin was India. Acetris disagreed with both the VA’s reliance on CBP’s ruling and the VA’s interpretation of the TAA, arguing that the TAA’s statutory country of origin test is not the only means to comply with the TAA. Rather, the VA should consider drug products TAA-compliant if they would otherwise comply with the BAA’s U.S.-made end product test by virtue of being manufactured in the U.S.

As a basis for this position, Acetris’ asserts that the TAA was not intended to increase the manufacturing threshold for those products that already meet the domestic end product definition under the BAA. Rather, under FAR Part 25.4, offers of designated country end products should expressly “receive equal consideration with domestic offers.” As a result, in Acetris’ view, if a product is already a domestic end product under the BAA—i.e., it is manufactured in the U.S.—it is unnecessary then to apply the TAA’s wholly manufactured or substantially transformed requirements that are used to determine the country of origin for non-domestic end products. By contrast, DOJ argues that the TAA fully supplants the BAA and, therefore, TAA compliance requires a showing that a product is either wholly manufactured or substantially transformed in the U.S. or a designated country, regardless of the BAA’s standards.

The CFC agreed with Acetris, concluding that the VA improperly construed the TAA as excluding the purchase of products that qualify as domestic end products under the BAA. Acetris, 138 Fed. Cl. at 599-601. Additionally, the CFC stated that the VA erred when it solely relied on CBP’s ruling, rather than conducting its own assessment of whether the product was a U.S.-made or domestic end product. Id. at 603. DOJ appealed the CFC’s determination to the Federal Circuit on both procedural and substantive grounds.

In a second line of litigation and concurrent with the CFC proceeding, Acetris filed suit in the Court of International Trade (“CIT”) directly challenging CBP’s ruling that Acetris’ U.S.-based processing of the API sourced from India was insufficient to meet the substantial transformation test required by the TAA. Acetris Health, LLC v. United States, 1:18-cv-00047-RWG (CIT). The CIT stayed this case pending resolution of DOJ’s appeal in the Federal Circuit, but our summary of the CIT proceeding is available here.

Parties’ Arguments on Appeal

On appeal to the Federal Circuit, the DOJ argued that Acetris’ protest at the CFC should have failed for jurisdictional reasons. In DOJ’s view, Acetris lacked standing because Acetris offered the highest-priced solicitation response[1] of three offers in a lowest-price, technically-acceptable (“LPTA”) procuremet and would not have won the award regardless of the proper interpretation of TAA compliance. Additionally, DOJ argued that the CFC’s jurisdiction had been usurped by the CIT proceeding. On the merits, DOJ and Acetris reiterated their arguments at the lower court: DOJ asserted that the TAA’s country of origin test—whether a product is wholly manufactured or substantially transformed—is the only test that applies for a TAA-subject procurement. In contrast, Acetris contended that in addition to the country of origin test, if a product is manufactured in the U.S., whether wholly or not, it is a TAA compliant product.

Federal Circuit Focus at Oral Argument

At oral argument, the Federal Circuit seemed less focused on the intersection of the BAA and TAA and instead zeroed in on procedural questions, as well as the proper application of the substantial transformation test. The panel pressed Acetris on its standing to protest, questioning whether Acetris was prejudiced by the VA’s interpretation of the TAA when it had no chance to win the solicitation as the highest priced of three bids in a LPTA competition. Acetris alleged that if the VA interpretation is correct — that the drug product is non-TAA compliant and thus ineligible to bid — then it would not be able to participate in any future solicitations for the product. Acetris sought to draw a parallel to Veterans Contracting Group v. United States, 133 Fed. Cl. 613, 618 (2017), where the CFC determined that a small business contractor was improperly removed from a VA database specifically for small business set-asides, impeding its ability to compete in future procurements. DOJ pushed back on this attempted parallel in rebuttal, by distinguishing review of a SBA decision, where the Federal Circuit clearly would have jurisdiction, from the instant case where, in DOJ’s view, the mootness of the issue precluded jurisdiction.

Additionally, the panel challenged Acetris to distinguish the operative facts of the proceedings before the Federal Circuit from those before the CIT to determine whether jurisdiction before the Federal Circuit is proper. Acetris argued that before the Federal Circuit is the issue of whether the VA applied the proper interpretation of the TAA in its solicitation, whereas the focus of the CIT litigation is the technical and scientific process of substantial transformation. Finally, with respect to substantial transformation, the Federal Circuit seemed persuaded by the idea that the processing that takes place in the U.S. is necessary for the product to be safe for consumers to consume, and therefore, the product should be considered a U.S.-made end product.

Key Takeaways

The Federal Circuit panel declared that that the TAA and BAA statutes and their implementing regulations are “not clear at all,” but did not tip its hand on the complex issue of statutory interpretation. Going forward, although the court could resolve this matter on procedural grounds, a decision on the merits could lend further support to the view that TAA compliance can be demonstrated by meeting the BAA’s test for a U.S.-manufactured product or satisfying a more lenient substantial transformation standard. Although the particular facts presented by Acetris involve drug products, a decision from the Federal Circuit on the merits of this case could have the potential to impact supply chains across all industries — either by clarifying that TAA compliance allows for only partial manufacturing in the U.S. or by ushering in a lower standard for demonstrating substantial transformation of a product in a designated country. Therefore, contractors selling to the U.S. government, including those offering commercial items, would be well advised to keep apprised of the court’s decision in this matter.

[1] Acetris submitted its bid to the VA after it filed suit challenging the solicitation terms and was later disqualified from the competition. The VA relied on the CBP’s ruling that Acetris’ product was not TAA-compliant to support its disqualification. Acetris, 138 Fed. Cl. at 601-02. After the contract was awarded, Acetris maintained its preaward suit in the CFC challenging the solicitation terms and the VA’s interpretation of TAA compliance. Acetris alleged its ability to compete in future solicitations would be severely diminished based on the VA’s improper interpretation that its products were not TAA compliant.

]]>U.S. and U.K. Sign CLOUD Act Agreementhttps://www.globalpolicywatch.com/2019/10/u-s-and-u-k-sign-cloud-act-agreement/
Thu, 17 Oct 2019 19:01:36 +0000https://www.globalpolicywatch.com/?p=9549Continue Reading]]>On October 3, 2019, the United States and United Kingdom signed an agreement on cross-border law enforcement demands for data from service providers (“Agreement”). The Agreement is the first bilateral agreement to be entered under the Clarifying Lawful Overseas Use of Data (CLOUD) Act. It obligates each Party to remove barriers in their domestic laws so that U.S. and U.K. national security and law enforcement agencies may obtain certain electronic data directly from Communications Service Providers (“CSPs”) located in the jurisdiction of the other Party. The Agreement will go into effect 180 days after its transmission to Congress by the Attorney General, unless Congress disapproves by joint resolution.

Under the CLOUD Act, once the Agreement goes into effect, CSPs subject to jurisdiction in the United States will be excepted from a statutory prohibition that would otherwise preclude them from producing stored communications content directly to U.K. authorities. Similarly, under U.K. law, CSPs subject to jurisdiction in the United Kingdom will not be prohibited from disclosing stored content to U.S. authorities. Neither the CLOUD Act nor the Agreement establishes jurisdiction over a CSP if jurisdiction does not otherwise exist, nor do they compel a provider to produce data if the domestic law of the Party issuing the data demand does not require such production. As a general matter, the domestic law of the United States and United Kingdom largely will continue to govern demands for data issued by government agencies under the Agreement. However, in accordance with the requirements of the CLOUD Act, the Agreement imposes some important limitations on those demands, which we summarize below.

Restrictions on Law Enforcement Demands

Targeting Restrictions. The Agreement imposes restrictions on the accounts that may be subject to demands for data under the Agreement. Specifically, the United Kingdom may not issue demands for data of U.S. citizens, nationals, or lawful permanent residents (“U.S. persons”), nor may it demand the data of persons located inside the United States. Similarly, the United States may not demand the data of any person located in the United Kingdom. (According to the U.K. Home Office’s explanatory memorandum, the distinction between these targeting limitations for the respective countries arises from EU rules prohibiting discriminatory treatment between citizens of different member states.) (Articles 1.12, 4.3).

Targeting Procedures. Each Party must implement “targeting procedures” to guide decisions about which accounts may be targeted by data demands under the Agreement. (Article 7.1).

Serious Crime Limitation. Any law enforcement demand for data covered by the Agreement must be “for the purpose of obtaining information relating to the prevention, detection, investigation, or prosecution” of a “Serious Crime, including terrorist activity.” While the CLOUD Act does not define “serious crime,” the Agreement specifies that serious crime is an offense punishable by a maximum term of imprisonment of at least three years. (Articles 1.5, 1.14, 4.1).

Specific Account Limitation. Consistent with the CLOUD Act, the Agreement also provides that the order must target specific user accounts and identify a “specific person, account, address, personal device, or any other specific identifier.” In other words, the Agreement cannot be used to acquire data in bulk. (Article 4.5).

Procedures for Issuance and Enforcement of Law Enforcement Demands

Application of the Agreement. The Agreement is not the exclusive means by which government authorities of a Party may obtain data from CSPs subject to the other Party’s jurisdiction. Each Party may still use other legal authorities and mechanisms, such as mutual legal assistance requests, to obtain data from CSPs subject to the jurisdiction of the other Party. The Agreement provides that it “shall apply” to any demands for data as to which the Party issuing the demand “invokes” the Agreement with notice to the relevant CSP. Notice to the other Party is not required. (Articles 3.2, 11.1).

Certification by Designated Authority. The Agreement provides for a “designated authority”—a governmental entity designated, for the United Kingdom, by the Secretary of State for the Home Department, and for the United States, by the Attorney General. These designated authorities must review demands for data under the Agreement and certify in writing that the demand is lawful and complies with the Agreement before it may be transmitted to a CSP under the Agreement. (Article 5.7).

Third-Party Country Notification. If either Party issues a demand for the data of a person reasonably believed to be located in a third-party country (i.e., not in the United States or United Kingdom), the designated authority of the Party issuing the demand must notify the appropriate authorities in that third country. The Agreement excepts from this notification requirement circumstances where notice would be “detrimental to operational or national security, impede the conduct of an investigation, or imperil human rights.” (Article 5.10).

Appeal to Designated Authority. If a CSP has a “reasonable belief” that the Agreement may not properly be invoked with regard to the order, it can make an objection to the designated authority of the Party that issued the order. If the objections are not resolved, the CSP can also make the objection to its own designated authority. That designated authority may determine that the Agreement does not apply to the demand if it concludes the Agreement was not properly invoked. (Articles 5.11, 5.12)

Data Handling and Use Restrictions

Minimization Procedures. The United Kingdom is obligated to implement and apply “minimization” procedures to data received pursuant to demands under the Agreement. These procedures must “minimize the acquisition, retention, and dissemination” of information concerning U.S. persons that is inadvertently acquired under the Agreement. (Article 7.2).

Restrictions on Data Transfer to the United States. The minimization procedures must prohibit the United Kingdom from disseminating to the United States the content of a communication involving a U.S. person unless it relates to a “significant harm, or threat thereof, to the United States or U.S. person, including crimes involving national security such as terrorism, significant violent crime, child exploitation, transnational organized crime, or significant financial fraud.” (Article 7.5).

Transfer to Third Countries. As a general matter, a Party receiving data under the Agreement may not transfer it to a third country or international organization without first obtaining consent of the Party from which the data was received. (Article 8.2).

Death Penalty and Free Speech Limits on Data Use. The United States must obtain approval from the United Kingdom before using evidence obtained from an order in cases for which the death penalty is sought. Similarly, the United Kingdom must obtain the approval of the United States in order to use evidence obtained from an order in a case that raises free speech concerns. (Article 8.4).

Oversight and Reporting

Compliance Review. Within a year of the Agreement’s entry into force and periodically thereafter, each Party must engage in a review of the other Party’s compliance with the Agreement, including a review of both its issuance of orders and handling of data received under the Agreement. (Article 12.1).

Annual Reports. The designated authorities of the United States and United Kingdom must issue and exchange annual reports containing aggregate data on their use of the Agreement. (Article 12.4).

]]>U.S.-China Trade Truce Leaves Considerable Uncertainty for Global Businesshttps://www.globalpolicywatch.com/2019/10/u-s-china-trade-truce-leaves-considerable-uncertainty-for-global-business/
Tue, 15 Oct 2019 20:18:47 +0000https://www.globalpolicywatch.com/?p=9540Continue Reading]]>President Trump last Friday announced tentative agreement on the first installment of a possible multi-stage deal to end the year and a half trade war between the United States and China. “The deal I just made with China is, by far, the greatest and biggest deal ever made for our Great Patriot Farmers in the history of our Country,” boasted Trump, saying China had pledged to buy $40-50 billion in U.S. agricultural products while also claiming agreement on financial services, currency, intellectual property, and technology transfer. He said the U.S. would further postpone a planned tariff hike while the details are worked out. Our detailed analysis on this tentative deal can be found here.

While this tentative deal signals a de-escalation in trade tensions that serves both sides, it is not likely, by itself, to stabilize the U.S.-China economic relationship in a durable way that lifts the uncertainty facing global businesses. The Federal Reserve has estimated that trade policy uncertainty could sap $850 billion — 1 percent — from the global economy in 2020, and the IMF assesses that the ongoing U.S.-China trade tensions alone may shave $700 billion, or 0.8 percent, off global output in 2020.

China’s official statements on the tentative “Phase One” deal have been remarkably cautious, noting that “both sides agreed to make efforts toward ultimately reaching agreement,” although the Foreign Ministry today affirmed that China was on the same page as the United States. A “Phase One” deal may well come together in time for Presidents Trump and Xi to announce it on the margins of the APEC summit in mid-November and may lead to postponement of new tariffs scheduled to take effect in December. But even so, it would only scratch the surface of the differences between the U.S. and Chinese economic systems that underlie the trade tensions and will continue to fuel them into the future. Those tougher issues would be left to negotiations on a Phase 2 deal, and it is questionable whether a comprehensive deal strong enough to warrant lifting all of the additional tariffs levied by both sides since March 2018 can be reached. Nor can a return to tariff escalation be ruled out if these talks bog down.

Moreover, even with an accommodation on trade, national security concerns on both sides and the growing geopolitical rivalry between the U.S. and China will likely continue to create new compliance risks for companies and disruptions to supply chains and business plans as each country seeks to reduce its dependencies on the other, particularly in the technology sector. Businesses will need to evaluate the specific risks and opportunities for their companies in different potential future scenarios as this the resetting of the U.S.-China relationship continues to unfold in the years to come.